DocketNumber： Docket No. 8922-87
Judges： BEGHE
Filed Date： 6/30/1997
Status： Non-Precedential
Modified Date： 4/18/2021
An order will be issued denying petitioners' Motion for Reconsideration with attached Motion to Consolidate.
SUPPLEMENTAL MEMORANDUM OPINION
BEGHE,
On or about June 25, 1979, Benness M. Richards and Jane Richards filed a joint Federal income tax return for 1978 reporting adjusted gross income of $ 86,574, taxable income of $ 11,975, and tax due of $ 3,495. In computing their taxable income, petitioners claimed an interest deduction attributable *354 to their participation in certain programs managed by Henry Kersting. Because petitioners' 1978 tax return is not part of the record in this case, we are unable to determine the specific amount of the Kersting-related interest deduction that petitioners claimed on their return.
On January 22, 1981, following an undercover investigation, the Internal Revenue Service (IRS) searched Mr. Kersting's offices pursuant to a search warrant issued by the U.S. District Court for the District of Hawaii. Among the materials seized during the search were lists identifying, by name and address, approximately 1,800 of Mr. Kersting's clients, and schedules showing the amount of interest purportedly paid by each client to one of several Kersting companies during the taxable years 1977, 1978, and 1979. The circumstances of the search of Mr. Kersting's offices are described in the Court's opinion in
On April 15, 1982, respondent issued a joint notice of deficiency to petitioners determining a deficiency in their Federal income tax for 1978 in the amount of $ 47,580.75 and an addition to tax under section 6653(a) *355 of deficiency, a form of notice apparently issued to a number of taxpayers with Kersting-related adjustments, states that respondent was disallowing $ 67,972.50 in interest deductions that petitioners purportedly paid to any entity owned, associated with, or controlled, either directly or indirectly, by Henry Kersting.
A simple arithmetical calculation reveals that respondent computed petitioners' tax deficiency by applying a tax rate of 70 percent, which was the highest tax rate imposed for 1978. *356 Nevels, Jr., Esq., filed a joint petition for redetermination (assigned docket No. 17445-82) on behalf of a large group of taxpayers, including petitioners, who had received notices of deficiency with Kersting-related adjustments. *357 and capricious.
On January 27, 1987, Luis C. DeCastro, Esq. (Mr. DeCastro), filed an entry of appearance on behalf of petitioners in docket No. 17445-82. In the interim, on December 23, 1986, respondent's counsel assigned to the Kersting project, Kenneth McWade, Esq. (Mr. McWade), had mailed Mr. DeCastro a letter enclosing proposed decision documents for petitioners and several other taxpayers with cases before the Court involving Kersting-related adjustments. On December 30, 1986, Mr. DeCastro executed a stipulated decision on behalf of petitioners which states that petitioners are liable for a deficiency in income tax for the taxable year 1978 in the amount of $ 23,000 and that petitioners are not liable for additions to tax under section 6653(a) or 6621(d). On the same date, Mr. DeCastro mailed a check to Mr. McWade, signed by petitioners and made payable to the IRS in the amount of $ 53,571, representing $ 23,000 in tax and $ 30,571 in interest. Mr. McWade executed the stipulated decision on April 27, 1987, and mailed the document to the Court.
On March 30, 1987, Mr. McWade filed a Motion to Sever petitioners' case from docket No. 17445-82. Shortly thereafter, the Court granted *358 the motion, severed petitioners' case from docket No. 17445-82, and assigned the case docket No. 8922-87. On May 8, 1987, the Court entered the parties' stipulated decision as described above in docket No. 8922-87.
Petitioners did not file a notice of appeal or a timely motion to vacate or revise the decision entered May 8, 1987. Consequently, the decision became final on August 6, 1987, 90 days after the decision was entered.
2.
During the period that petitioners' case was docketed with the Court, 14 dockets and eight petitioners with Kersting-related adjustments were selected as test cases for trial.
On January 12, 1987, during the same period that Mr. DeCastro was negotiating petitioners' settlement, the test case taxpayers filed a motion for leave to file an amendment to their petitions to raise various evidentiary issues based upon their contention that the search of Mr. Kersting's offices was illegal. On January 14, 1987, the Court granted the test case taxpayers' motion for leave to file. The evidentiary issues raised in the amendment to petition were resolved in the Court's opinion in Dixon I. *359
Mr. McWade served as respondent's lead counsel during the trial of the test cases. One of the taxpayers selected as a test case, John Thompson, was represented by Mr. DeCastro at trial.
The Kersting test cases went to trial in January 1989 in Hawaii. Following the trial, the Court issued its Memorandum Opinion in
The Court's decision in Dixon II subsequently was vacated and *360 remanded on appeal to the Court of Appeals for the Ninth Circuit in
Upon remand, the Court gave effect to the direction of the Court of Appeals regarding intervention by allowing a number of non-test-case taxpayers who had previously signed stipulations to be bound by the decision in Dixon II to participate in the evidentiary hearing. Robert Alan Jones, Esq. (Mr. Jones), entered his appearance on behalf of a group of non-test-case taxpayers allowed to participate in this fashion.
During the evidentiary hearing, which was held at a special trial session of the Court in Los Angeles in May-June 1996, Mr. Jones expressed concern that, in addition to the settlement with John Thompson, Mr. McWade may have entered into settlements with other clients of Mr. DeCastro on terms more favorable than the standard Kersting project settlement offer. In this regard, Mr. Jones requested respondent's counsel, Mary Elizabeth Wynne, Esq. (Ms. Wynne), to disclose the details of settlements entered into with Mr. DeCastro's clients, including petitioners. In a letter to Mr. Jones dated September 3, 1996, Ms. Wynne attempted to explain that petitioners did not receive special treatment *362 from Mr. McWade in the settlement of their case as follows: As we discussed on the telephone, I have received authorization from Mr. and Mrs. Richards to disclose the attached copy of the computer transcript of the Richards' account for 1978. As you are aware, neither the government nor the Richards has a copy of the Richards' 1978 return. But the information on the enclosed transcript reflects the following information concerning the 1978 return filed by the Richards. The 1978 tax return was filed June 25, 1979, and showed an income tax liability of $ 3,495. Advance or estimated payments of $ 8,931 were credited to the account on April 15, 1979. On June 25, 1979, a refund of $ 5,489.09 was generated to the Richards (along with interest of $ 53.09). On December 31, 1986, the Richards's account was credited with a tax payment of $ 23,000 and interest of $ 30,571. The tax of $ 23,000 and interest of $ 30,571 were assessed on October 5, 1987 (which date was within 60 days of the date the Tax Court decision became final). In addition to showing the above information, the enclosed transcript also shows that the Richards's reported adjusted gross income of $ 86,574 on their 1978 return, *363 and taxable income of $ 11,975. The maximum tax rate in 1978 was 70 percent, but that rate did not apply until taxable income reached $ 203,200 for joint filers. Accordingly, even without allowance of the Kersting related deductions, the Richards's taxable income in 1978 was not high enough to trigger the maximum tax rate of 70 percent that was used in the notice of deficiency. Thus, any comparison of the amount asserted in the notice with the amount on decision must be made after adjusting for the proper tax rate. As the Court noted during the hearing, the petition filed on behalf of the Richards alleged that Kersting related deductions were only $ 38,523. Assuming the petition is correct, the tax on taxable income of $ 50,498 ($ 11,975 per the return and $ 38,523 disallowed Kersting deductions) is $ 15,709, which produces a deficiency of $ 12,214 ($ 15,709 less the $ 3,495 reported on the return). A seven percent reduction of this deficiency results in a deficiency of $ 11,359, far less than the deficiency in the decision of $ 23,000. The explanation for this discrepancy lies in the fact that several Kersting participants received notices of deficiency based on a reconstruction of *364 records obtained from Mr. Kersting's office in 1981. For the year 1978, the statute of limitations would have expired in 1982. Thus, the notice may have been issued without access to the original return. Whatever the reason for the discrepancy, it is clear that the Richards did not receive any kind [of] special treatment from Mr. McWade.
On November 8, 1996, Mr. Jones filed an entry of appearance on behalf of petitioners and a Motion for Leave To File Motion To Vacate Decision (motion for leave). On that same date, the Court lodged petitioners' Motion To Vacate Decision and Set Aside Settlement and petitioners' Memorandum of Points and Authorities. Petitioners' Motion To Vacate Decision was based upon the theory that the notice of deficiency issued to petitioners was invalid under
On November 14, 1996, the Court issued a Notice of Filing directing respondent to file an objection, if any, to petitioners' motion for leave on or before December 5, 1996. On November 29, 1996, respondent filed a Motion to Extend Time *365 To File Respondent's Objection to petitioners' motion for leave. In an Order dated December 4, 1996, the Court granted respondent's motion and extended the date for respondent to file an objection to January 6, 1997.
On April 9, 1997, the Court filed petitioners' Motion for Reconsideration with attached Motion To Consolidate and petitioners' Memorandum of Points and Authorities. Petitioners contend that the Court should reconsider its denial of petitioners' motion for leave on the grounds that the Court "misinterpreted" petitioners' Motion To Vacate Decision, and the Court incorrectly denied petitioners' motion for leave without first allowing petitioners *366 to file their Motion To Vacate Decision, conduct necessary discovery, and have a hearing.
Petitioners maintain that the Court misinterpreted their Motion To Vacate Decision insofar as the Court treated the motion as an attempt to challenge the validity of the notice of deficiency under
In conjunction with their Motion for Reconsideration, petitioners contend that their case should be consolidated with it is an abuse of discretion under the circumstances of the Kersting cases including the massive and continuing *367 fraud committed and condoned by representatives of Respondent and its Office of Chief Counsel for the Office of Chief Counsel, and this Honorable Court, to further attempt to "split off and contain" the illegal and improper fraudulent conduct of Respondent by attempting to deal with the overall conspiracy by ruling on improper actions one at a time, thus preventing their consolidation into a single action which may be properly ruled upon by the panel of United States Court of Appeals for the Ninth Circuit which has retained jurisdiction over these matters.
In an order dated April 11, 1997, the Court directed respondent to file a response to petitioners' motion, while allowing Robert Patrick Sticht, Esq. (Mr. Sticht), counsel for non-test-case taxpayers participating in the
On May 12, 1997, respondent filed a response in opposition to petitioners' Motion for Reconsideration with attached Motion To Consolidate.
On May 30, 1997, pursuant to the Court's order *368 dated April 11, 1997, Mr. Sticht filed a response in opposition to petitioners' motion insofar as petitioners seek to have their case consolidated with the
1.
Petitioners did not file a notice of appeal or a timely motion to vacate or revise the stipulated decision that was entered in this case on May 8, 1987, and the decision became final on August 6, 1987. See secs. 7459(c), 7481(a) (1). As a consequence, petitioners were required to file a motion for leave to file their motion *369 to vacate the stipulated decision entered in their case.
Petitioners' assertion that the Court incorrectly denied their motion for leave without first permitting petitioners to file their Motion To Vacate Decision, conduct necessary discovery, and have a hearing, is misconceived. In deciding whether to grant or deny a motion for leave to file a motion to vacate a final decision, it is ordinarily the Court's practice to consider the merits of the underlying (lodged) Motion To Vacate Decision to determine whether the moving party has alleged sufficient facts to properly question the validity of the decision. See
In the present case, the Court thoroughly considered the arguments *370 contained in petitioners' supporting Memorandum of Points and Authorities as reflected in the detailed analysis set forth in the Court's Memorandum Opinion in Richards I. Specifically, based upon petitioners' clear reliance on
Petitioners also complain that they were not timely served with respondent's Response to their motion for leave, and that the Court denied their motion for leave without first allowing them to reply thereto. Any prejudice to petitioners occasioned by the delay in service of respondent's Response, which was made in accordance with Rule 21(b), has been obviated by our consideration of petitioners' Motion for Reconsideration articulating their position respecting respondent's Response to their motion for leave, to which we now turn.
2.
The Tax Court generally lacks jurisdiction to vacate a final decision.
As *372 previously mentioned, in Richards I we rejected petitioners' contention that the notice of deficiency issued to them was invalid and that the Court lacked jurisdiction to enter the stipulated decision in their case. In so holding, we determined that the notice of deficiency issued to petitioners was not invalid on its face. We see no benefit to revisiting that issue in any detail here.
Petitioners contend that we should reconsider our decision denying their Motion for Leave To File Motion To Vacate Decision on the ground that we misinterpreted the basis for the motion. Although we are confident that we did not "misinterpret" the basis for petitioners' motion, *373 we nevertheless will address petitioners' Motion for Reconsideration insofar as they now contend that the stipulated decision entered in their case should be vacated due to fraud upon the Court. In particular, we will consider the merits of petitioners' allegations that the stipulated decision entered in their case is the result of fraud upon the Court. We will grant petitioners' motion for leave only if we are satisfied that petitioners have alleged sufficient facts to support further inquiry into the matter.
In
Petitioners' allegations of fraud upon the Court are summarized in petitioners' Memorandum of Points and Authorities in support of petitioner's Motion for Reconsideration as follows: 1. Respondent committed fraud upon the United States Tax Court by a series of actions as set out in paragraphs 1-4 herein, beginning by conducting an illegal search and seizure of the promoter Henry Kersting's offices and records in January 1981 3. The same counsel for *375 Respondent, who obtained the fraudulent settlement from Petitioners, Kenneth McWade also, with others, committed a further series of frauds on the Court in the related consolidated Kersting test cases of Petitioners Thompsons and Cravens, and the settlement of the cases of non-test case petitioner Denis Alexander. 4.
Mr. Jones' affidavit in support of petitioners' Motion for Reconsideration includes a statement that Mr. Jones is attempting to obtain an affidavit submitted by an IRS employee to the Court "in a related proceeding" purportedly stating that the materials seized from Mr. Kersting were not used in the preparation of notices of deficiency *376 issued to Kersting investors--a statement that would be inconsistent with statements made in Ms. Wynne's letter dated September 3, 1996.
We have considered petitioners' various contentions, and we are not persuaded that they have satisfied their heavy burden of particularized pleading and proof that the stipulated decision entered in their case is the result of a fraud upon the Court. We will address each of petitioners' allegations of fraud in turn.
Petitioners first assert that respondent conducted an illegal search and seizure in Mr. Kersting's office in January 1981. We note, however, that Mr. Kersting's various challenges to the legality of the January 1981 search and seizure have been repeatedly rejected by the U.S. District Court for the District of Hawaii. See
Petitioners further allege that respondent used the materials that were seized from Mr. Kersting to issue statutory notices of deficiency to Kersting investors, including petitioners, without a rational basis, and thereby fraudulently tolled the statute of limitations. We find it necessary to break this allegation down into its component parts.
It has been evident for some time that the materials that were seized from Mr. Kersting's offices were made available to respondent's agents for purposes of conducting civil audits of Kersting investors. *378 See
In sum, in Richards I we held that the notice of deficiency issued to petitioners is facially valid. Petitioners have offered no evidence to the contrary.
Although petitioners' Motion for Reconsideration does not clearly state the proposition, we assume that petitioners seek discovery and an evidentiary hearing in part to attempt to develop evidence that the notice of deficiency is invalid. However, to permit the use of such procedures under the circumstances presented would run counter to the well-settled principle that we generally will not look behind a notice of deficiency to examine the evidence used by the Commissioner in the determination of a deficiency.
Because we reject petitioners' argument that the notice of deficiency lacks a rational basis, it follows that petitioners' contention that the notice of deficiency served as the means for respondent to fraudulently toll the period of limitations likewise fails.
The remaining elements of petitioners' theory of fraud upon the Court merit little discussion. Petitioners assert that respondent deliberately concealed that respondent had fraudulently obtained "jurisdiction" over Kersting investors, including petitioners, and then forced the many taxpayers so affected into settlement or trial. As discussed above, we reject the notion that respondent fraudulently obtained jurisdiction over petitioners. We have no reason to doubt that all information necessary for petitioners to contest the validity of the notice of deficiency, i.e., petitioners' 1978 tax return and the *382 notice of deficiency, was readily available to petitioners at the time the notice of deficiency was issued. *383 was the result of an unconscionable plan or scheme that was designed to improperly influence the Court in its decision or that any act was committed that prevented petitioners from fully and fairly presenting their case to the Court. Consequently, it follows that we lack jurisdiction to vacate the decision in this case.
We now turn to petitioners' motion to consolidate their case with the
To reflect the foregoing,
*. This opinion supplements our previous Memorandum Opinion in Richards v. Commissioner, T.C. Memo. 1997-149, filed March 24, 1997.↩
1. Although Luis C. DeCastro, Esq., continues to be listed as counsel of record in docket No. 8922-87, he did not participate in the filing or prosecuting of the motion that is the subject of this opinion.↩
2. Although the background of this case is set forth in
3. Section references are to the Internal Revenue Code, as amended. Rule references are to the Tax Court Rules of Practice and Procedure.↩
4. The notice of deficiency was issued approximately 70 days prior to the expiration of the normal 3-year period of limitations applicable to the assessment of Federal income taxes. Sec. 6501(a).↩
5. Inasmuch as there were no other adjustments in the notice of deficiency, and assuming that the adjusted gross income that petitioners reported is correct, respondent erred in computing petitioners' tax liability for 1978 using a 70-percent tax rate, which was only applicable with respect to taxable income exceeding $ 203,200 for joint filers.↩
6. Petitioners resided in Woodland Hills, California, at the time the petition was filed.↩
7. The petition identifies the payees as Atlas Funding Corp., Fargo Acceptance Corp., Federated Finance Co., Forbes Acceptance Corp., and Mahalo Acceptance Corp.↩
8. In
We further note that Mr. Kersting's claims that the search and seizure were illegal have been repeatedly rejected by the U.S. District Court for the District of Hawaii. See
9. The appellate panel in
10. The Court's Dec. 4, 1996, Order expressly directed that the Order be served on Mr. Jones.↩
11. Petitioners' Motion for Leave to File Motion To Vacate Decision states that the holding in
1. Petitioners do not agree with Judge Goffe's decision regarding Kersting investors' standing under the
12.
13. A finding that a notice of deficiency was issued on an arbitrary basis does not render the notice invalid, see
14. Indeed, Mr. Nevels included allegations in the petition that the notice of deficiency was arbitrary. Further, allegations were raised in the test cases that the notices of deficiency issued to the test case taxpayers were invalid due to the use of materials seized from Mr. Kersting at the same time that Mr. DeCastro was engaged in settlement negotiations with Mr. McWade respecting petitioners' case. Although the record does not disclose whether Mr. DeCastro pursued this particular point with Mr. McWade, we note that petitioners do not allege, and there is no evidence in the record, that the issue was not raised because of any collusion or fraud.↩
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